In January 2013, for example, Bank of America Merril Lynch agreed to pay the government $11.6 billion in penalties relating to the mortgage transactions it had conducted with intermediary Fannie Mae. Withholding punishment until such a time as the banks were strong enough to take the pain was a shrewd move. Retribution may have come too slowly for some critics, but it did come eventually, and at a time when the offenders could afford to pay.

Draghi : “the ECB will do whatever it takes to preserve the euro. And believe me, it will be enough.” He was a major European figure making a clear and unequivocal guarantee.

The lack of substance to Drgahi’s plan symbolized a fundamental problem at the heart of euroland: so complicated are its central institutions and so diverse the political and economic outlooks of its various members that it is difficult to bang heads together and agree on decisive action.

Greece: Early 2010 an EU report highlighted severe irregularities in its public accounts. Aided by its adviser, the US investment bank Goldman Sacks, some critics argued it had used derivatives to shift debt obligations off its balance sheet and disguise the terrible underlying state of its finance. “Greece with the assistance of Goldman Sachs cooked the books totally.”

Ireland: the medicine doled out was strong and hard to swallow. Public sector employees had to accept real wage cuts of up to 40%. Pensions and workplace benefits were cut….It even look set to become the first country to leave the programme imposed by the troika. The Irish economy was projected to grow by 2% in 2014. But public debt that amounted to 25% of GDP in 2007 soared to a peak of 123% in 2013.

Out of control banks were not at the root of every struggling economy. Portugal had simply become uncompetitive (as opposed to Ireland and Greece, where crisis resulted from poor banking business).

Cyprus : a 20% levy was imposed on those depositors with over €100.000 in their accounts. Nicosia was obliged to sell off a range of assets, including €400 million of its gold reserve. Large deposits were paying the heavy price. It was a message that reverberated across the Eurozone. Russians seeking to leave the country with their aluminium suitcases found themselves out of luck. A combination of temporary bank closures and new capital controls made it far more difficult to extract funds.

By the spring of 2013, the EU had created the European Stability Mechanism, the ECB had cut interest rates and launch a huge three-year €1 trillion loan programme to stabilize over 1,300 debt-ridden banks in the region and the long term refinancing operations bought time for banks and trouble nations to begin restructuring the debt built up. But little was done to resolve the underlying problems of a banking system too weak to support any kind of economic recovery.

If one country can be said to embody both the wishful thinking and the huge problems still lurking in Europe it is Italy. The most emotive struggle for Italy has been the battle to save Banca Monte dei Paschi di Siena. Founded in 1472, the bank is regarded as the world’s oldest. Despite its distinguished history the bank has been brought low by cultural corruption that affected the bankers across the piece.

More than 3 years after the collapse of Lehman Brothers there was no indications that bonus structures which incentivize employees to take irresponsible decisions had been curbed. Under the ‘volker rule’ the type of risky activity these individuals became involved with would be banned by a bank insured by the US government.

Libor: the most important number in finance, it underlies some $800 trillion worth of financial instruments (about 6 times the world economy) ranging from interest rate derivatives to mortgages. Each day 16 major banks have been asked at what rate could they borrow funds from the inter-banking market just before 11.00am. They would submit estimates to borrow across 10 currencies and 15 lengths of loan (from overnight to 12 months). Once submitted, Thomson Reuters (who collect the data) would remove the four highest and four lowest submission and average the remaining 8. Traders routinely asked banks’ submitters (of Libor data) to submit particular rates to benefit their derivatives trading positions which were priced on Libor.

Looking back over 30 years of investment banking he noted with regrets how bankers had gone from building businesses to focusing purely on increasing returns.

In 1969 just 6.6% of the UK stick market was held by institutions outside Britain. By 2013, this figure had leapt to 53.2%. This reflect globalization and Britain openness to trade.

Mervyn King (Governor of the Bank of England: It is not in our interest to have banks that are too big to fail, too big to jail, or simply too big. His successor Mark carney : Fairness demands the end of a system that privatizes gains but socializes losses.

Tax havens are at the heart of financial, budgetary, and democratic crisis.

On a global scale, 8% of the financial wealth of households is held in tax havens. In the spring of 2015 foreign wealth held in Switzerland reached $2.3tn. Since April 2009, when countries of the G20 held a summit in London and decreed the ‘the end of bank secrecy’, the amount of money in Switzerland has increased by 18%. For all the world’s tax havens combined, the increase is close to 25%. And we are only talking about individuals here. 55% of all the foreign profits of US firms are now kept in such havens.

To fight offshore tax avoidance, the first measure is to create a worldwide register of financial wealth, recording who owns what. Financial registry exist but they are fragmentary (Clearstream).

In France, on the eve of the 1914-18 war, a pre-tax stock dividend of 100 francs was worth 96 francs after tax. Throughout the 19th century, European families paid little or no tax. In 1920 the world changed. Public debt exploded. That year the top marginal income tax rose to 50%, in 1924 it reached 72%. The industry of tax evasion was born.

In 1920, the wealth was made up of financial securities: stock and bonds payable to the bearers. Owners looked for safe places to keep them. The bank then took the responsibility for collecting dividends and interest generated by those securities. Many banks could do this but Swiss bank offered the possibility of committing tax fraud. Off-balance sheet activities are the holding of financial securities for someone else (they don’t belong to the bank but to clients). The most rapid growth of assets in Swizerland were in 1921-22 and 1925-27. Swiss bank secrecy laws followed the first massive influx of wealth (from France mostly), not the reverse.

For the most part, non-Swiss residents who have accounts in Switzerland do not invest in Switzerland – not today, not in the past. Swiss bank offshore successes owes nothing to the strength of the Swiss francs. Ithas to do with tax evasion.

Charles de Gaulle imposed a condition on the rapprochement between Switzerland and the allies in 1945: Berne was to help identify the owners of undeclared wealth. For Congress it was out of the question to send billions of dollars via the Marshall Plan without trying to tax French fortunes hidden in Geneva. Berne then engaged in a vast enterprise of falsification: they certified that French assets invested in US securities belonged not to French people but to Swiss citizens or to companies in Panama.

Recent policy changes are making it more difficult for moderately wealth individuals to use offshore banks to dodge taxes: for them the era of banking secrecy is coming to an end. The decrease of little account is more than made up for by the strong growth of assets deposited by the ultra-rich, in particular coming from developing countries.

In Switzerland, banks managed $2.3tn belonging to non-resident. $1.3tn belong to Europeans (DE,FR,IT,UK), mostly through trust and shell corporations domiciled in the British Virgin Islands. 40% is placed in mutual funds, principally in Luxembourg. With more than $150bn in Switzerland – more than the US has, a country with a GDP 7 times higher – the African economy is the most affected by tax evasion.

If we look at the world balance sheet, more financial securities are recorded as liabilities than as assets, as if planet Earth were in part held by Mars. This amount to $6.1tn in 2014 and the bulk of the imbalance comes from Luxembourg, Ireland and Cayman Islands. This imbalance is a point of departure for estimate of the amount of wealth held in tax havens. I estimate that $7.6tn (8% of global household financial assets) is held in accounts located in tax havens (this includes $1.5bn of bank deposits). The true figure, all wealth combined, is 10% or 11%.

It is one of the great rules of capitalism that the higher one rises on the ladder of wealth, the greater the share of financial securities in one’s portfolio. Corporate equities – the securities that confer ownership of the means of production, which leads to true economic and social power – are especially important at the very top.

On a global level, the average return on private capital, all class of assets included, was 5% per year during the last 15 years. Slightly decreased since the 1980-90, when it was closer to 6%. This is real rate, after adjusting for inflation. Prudent funds, with 40% low risk bonds, have earned on average 6% per year. Those who invest in international stocks have returned more than 8%. As for Edge funds, reserve for the ultra-rich, their average performance has exceeded 10%.

Foreign Account Tax Compliant Tax (FATCA): passed by Congress and Obama’s administration in 2010 – Financial institutions throughout the world must identify US clients and inform the IRS to ensure that tax on interest income, dividends and capital gains are paid. Foreign banks refusing to disclose accounts held by US taxpayers face sanctions: a 30% tax on all dividends and interest income paid to them by the US. Tax havens can be forces to cooperate if threatened with large-enough penalties.

To believe that tax havens will spontaneously give up managing the fortunes of the world’s tax dodgers, without the threat of concrete sanctions, is to be guilty of extreme naïveté.

The IRS signed a check for $104 million to the ex-banker of UBS, Bradley Birkenfeld, who revealed the practice of his former employer. But one may well doubt the effectiveness of this strategy as to rely exclusively on whistle blowers to fight against tax-havens is not strong policy.

The EU saving tax directive, applied in the EU since July 2005 is to fight against offshore tax evasion by sharing information between countries about clients. Yet this was a failure: Lux and Austria were granted favourable terms and do no exchange information with the rest of Europe. Lux could give the persistence of banking secrecy in Switzerland to block any revision of the directive. Lux and Austria instead of sharing information must apply a withholding tax (35%) which is less than the top marginal income tax in France. Then the tax applies only to EU owners, not to accounts held by shell corporations, trusts or foundations. And the directive applies only to interest income, not dividends. Why? This is a mystery. Was it incompetence? Complicity? The main effect has been to encourage Europeans to transfer their wealth to shell corporations (+10% in Switzerland, in the months that followed the entre into force of the Directive). Swiss bankers have deliberately torpedoed the saving tax directives. No sanctions, no verifications foreseen…it is high time to wake up to reality.

The real owners (or if they are more cautious, their lawyers) are generally given a power of attorney by the nominee directors to access bank account of the safe. In most cases, no one but the bank, the nominee directors and Mossack Fonseca knows about this power of attorney.

Both the CPI (Center for Public Integrity) and ICIJ (International Consortium for Investigative Journalists) are financed by donations, one of the main donors being the left-leaning billionaire George Soros.

Fonseca is currently an advisor to the Panamian President Juan Carlos Varela with a seat in the cabinet, as well as being a deputy chairman of the governing party, Panamenista.

Mossfon employees hire a firm called Marcatrade to carry out what experts call ‘online reputation management’: if someone types in ‘Mossack Fonseca’ they should not be immediately confronted with negative articles on the first few pages of results.

The Stolen Asset Recovery Initiative (StAR), a joint project between the World Bank and the UN Office on Drugs and Crime. StAR looks for money that autocrats and dictators have stolen from their own countries.

Our data sketches out how entangled almost all German banks were or are in the offshore system. Of course, not every case involves assistance with tax evasion – but as we shall see, a great many do. Even state owned banks help clients to cheat the state.

The Makhlouf case (friend of Assad’s family in Syria) demonstrates why the existence of anonymous shell companies poses an existential threat to millions of people. Because they can help dictators to circumvent sanctions imposed by the international community. Because they can help brutal leaders to plunder the country they rule. And because they allow them to hide these stolen assets in shell companies, although the related account is often located in Switzerland or Luxembourg.

The name of the former Uruguayan FIFA vice President Eugenio Figueredo, one of the six officials arrested in Zurich, appears in connection with several companies. One is Cross Trading S.A. established in the Seychelles, in Nevada and in Niue. The contract cover exclusive Ecuadorian TV rights to the UEFA Champions League, the UEFA cup and the UEFA super cup – all for astonishingly low sums of money. The Contract are is Mossfon’s possession because UEFA sent the documents relating to these TV rights to the attention of Cross Trading SA in Niue (where Mossack Fonseca has staff). According to the contracts, the company paid a total of just under $140,000 for all exclusive TV broadcasting rights. We calculate that Cross Trading would have sold on the UEFA TV rights at a premium of $600,000 in the years between 2003 and 2009. Cross Trading bought TV rights cheaply from UEFA and sells them on to Teleamazonas for a much higher sum (typically 3 to 4.5 times more).

Annan Junior (son of Kofi Annan, UN Secretary General) owns two shell companies in the British Virgin Islands and a third in Samoa. Until at least 2015, the co-owner (of one Virgin Islands account) was the son fo the prominent former senator of Nigeria. A few year previously, Kojo Annan had been involved in some controversial business, namely the scandal surrounding the Iraqi Oil-For-Food programme. Annan was working for a company that supervise the delivery of a UN relief aid to Iraq (he was cleared of any wrong doing by an internal investigation)

There are also countless reports in which they freely admit that the European interest income tax introduced in 2005 will boost business with this or that client. The tax is only applicable to accounts held by EU citizens, not to accounts held by Panamanian companies. The tax functioned as a turbo boost for business at companies like Mossack Fonseca. The share of accounts held through offshore companies rose by 10% in Switzerland alone. The number of private individuals registered as account holder sank accordingly.

And it gets even more absurd: in the data we find file after file containing masses of blank, signed pages. Empty white pages, with the signature of three nominee directors in various combinations. Sometimes the signatures are at the bottom, sometimes in the middle, sometimes at the top. These pages could become anything. A purchase agreement, a new power of attorney, the closure of a company.

According to the charity Oxfam, the top 1% of the global population has more wealth than the rest of the world put together. It’s hardly surprising that a booming industry has formed around this one percent, existing solely by adding to this tremendous wealth.

According to the British author Tom Burgis (2015), you ought to imagine what’s happening in Africa like this: and invisible looting machine is working to plunder the continent. A coalition of corrupt dictators, unscrupulous large corporations and ruthless banks, all working hand in hand, united by their greed.

Experts estimate that more than $50billion flows out of Africa every year. On top of this African states avoid paying about $38 billion in taxes, because companies operating there divert their profits to tax heavens, as revealing in 2013 by a group of experts led by Kofi Annam.

The minister of petroleum of Angola, José Maria Botelho de Vasconcelos, appears in the data as beneficiary of Medea Investments Ltd. The Company was established in Niue in September 2001.

Tax havens, hedge funds, Mossack Fonseca, world hunger; for him (Jean Ziegler, Special rapporteur on the Right to Food) is all one and the same. Everything is connected and mutually dependent.

A year after Beny Steinmetz, one of the richest men in the world, acquired the mining rights, his company BSGR (Beny Steinmetz Group Resources) sold half of the Simandou arm of his business empire to the Brazilian mining company Vale for an incredible $2.5 billion. According to media reports, the company didn’t pay anything up front to the Guinean state for the mining rights. It had apparently declared that it was prepared to invest $165m in the iron-ore filed in the future. The annual budget of the Guinean government at that time was $1.2bn: BSRG received twice as much. The Independent referred to the BSGR-Vale deal as “the corruption deal of the century”.

According to Forbes, the 100 richest Chinese people have accumulated fortunes worth more than $450bn, which is an average of $4.5bneach.

FIFA Vice president Eugenio Figueredo was arrested in Switzerland last year. Argentinian TV rights agents Hugo Jinkis and his son had three shell companies incorporated by Mossack Fonseca, all with the same name, Cross Trading, but based in three different tax havens: the island of Niue, the US state of Nevada and the Seychelles. Bribes worth millions to secure broadcasting rights for football tournaments were channel through the accounts of the Cross Trading companies.

The Tax Justice Network wrote in 2008 in a memorandum for the UK House of Commons Treasury Committee: ‘within the financial sector it would have been impossible for the current credit crunch to have happened if offshore had not existed’

Mossack Fonseca does not tend to have links to the big corporations (such as Amazon etc.), which is why this topic is barely touched on here.

The world of organized crime in all its many forms makes use of the offshore industry just as much as fraudsters and criminals acting individually, using it to erase its tracks and conceal its crimes. The irresponsibility witnessed in the offshore centers of this world is the result of laws that can be changed. The first big step would be to introduce and effective system for the automatic exchange of information about bank accounts. The British authorities would then automatically know about any accounts held by British citizens. What is needed as well is a globally transparent register of companies. It would have to list the real owners of companies and foundations – and providing false information would have to be made a criminal act.

Note too, that tax secrecy is not in itself a universal human right. In part of Scandinavia, such as Norway, tax records have been public for years.

According to Tax Justice Network, Africa loses out on twice as much money through tax evasion as it receives in development aid.

Mosack Fonseca used its influence to write and bend laws worldwide to favour the interests of criminals over a period of decades. In the case of the island of Niue, the firm essentially ran a tax haven from start to finish. Prime Minister John Key has been curiously quiet about his country’s role in enabling the financial fraud mecca that is the Cook Islands.

The post-war confidence that Keynesian ideas – the use of public spending to expand total demand in the economy – would prevent us from repeating the errors of the past was to prove touchingly naïve. Expansionary policies during the 1960s, exacerbated by the Viet-Nam war, led to the great inflation of the 1970s, accompanied by slow growth and rising unemployment – the combination known as stagflation.

My own accounts of event (re the crises) will be made available to historians when the twenty-year rule permits their release.

Today we are stuck with extraordinary low interest rates, which discourage saving – the source of future demand – and, if maintained indefinitely, will pull down rates of return on investment, diverting resources into unprofitable projects. Both effects will drag down future growth rates.

Three bold experiments since the 1970s: to give central banks much greater independence in order to stabilize the inflation; to allow capital to move freely between countries and encourage a fixed exchange rates (in Europe, between China and US); to remove regulations limiting the activities of the banking and financial system (more competition, new products, geographic expansion) to promote financial stability.

Three consequences : the Good was a period between 1990 and 2007 of unprecedented stability of both output and inflation – the Great Stability with inflation targeting spreading to 30 countries; the Bad was the rise of debt level: eliminating exchange rate flexibility in Europe and emerging markets led to growing trade deficits and surpluses. Richer country could borrow to finance deficits and long term interest rates began to fall (too much saving). Low long term interest has an immediate effect: the value of assets (today’s value) – specially houses – rose. As value increased, more borrowing was needed to buy those assets – from 1986 to 2006, household debt increase from 90% of household income to 140% (in the UK). The Ugly was the development of an extremely fragile banking system. Separation between commercial and investment banking was removed. Trading of new and complex financial products among banks meant that they became closely connected: a problem in one would spread rapidly to others. Equity capital (funds provided by shareholder of the bank) accounted for a declining proportion of overall funding. Leverage (the ratio of total assets (liabilities) to equity capital rose to extraordinary level (more than 30 for most bank, up to 50 for some before the crises)

Total saving in the world was so high that interest rates, after allowing for inflation, fell to level incompatible in the long run with a profitable growing market economy.

No country had incentives to do something about imbalances. If a country had, on its own, tried to swim against the tide of falling interest rates, it would have experience an economic slowdown and rising unemployment, without having an impact on the global economy or the banking sector.

In 2002, the consensus was that there would eventually be a sharp fall in the value of the US dollar, which would produce a change in spending patterns. But long before that could happen, the banking crises of September and October 2008 happened.

Opinions differ as to the cause of the crises: some see it as financial panic as confidence in bank creditworthiness fell and investors stopped lending to them- a liquidity crises. Other see it as the outcome of bad lending decisions by banks – a solvency crises. Some even imagine that the crises was solely an affair of the US financial sector.

The story of the crises

After the demise of the socialist model, China, Soviet Union, India embraced the international trading system. China alone created 70 million manufacturing jobs, far exceeding the US 42 million jobs in US and Europe combined (in 2012). The pool of labour supplying the world trading system more than trebled in size (depressing real wages in other countries). Advanced countries benefited from cheap consumer goods at the expense of employment in the manufacturing sector. China and other Asian countries produced more than they were spending and saved more than they were investing a home (in the absence of social safety net, and a one child only policy in China preventing parents to rely on their children when retiring). There was an excess of saving, which pushed down long term interest rates around the world. Short term interest rate are determined by central banks but long term interest rate result from the balance between spending and saving in the world as a whole. IN recent times, short term real interest (accounting for inflation) have actually been negative (official rates have been less than inflation). In the 19th century, real rates were positive and moved within 3% to 5%. It was probably 1.5% when the crises hit and since then has fallen further to around zero. Lower interest rate and higher market prices for assets boosted investment. It appeared profitable to invest in projects with increasing low real rates of return. For a decade or more after the fall of Berlin wall, consumer benefited from lower prices on imported goods. Confronted with persistent trade deficit, developed countries (US, UK, part of Europe) relied on central banks to achieve growth and low inflation by cutting short term interest to boost the growth of money, credit and domestic demand. This was an unsustainable path in many, if not most, countries. Saving in Asia and debt in the West produce major macroeconomic imbalance. Normally capital flow from mature to developing countries where profitable opportunities abound. Now emerging economies were exporting capital to advanced economies where opportunities were more limited. Most of these financial flow passed through the western banking system leading to a rapid expansion of bank balance sheets (all bank’s asset – the loans to customers – and liabilities – the deposit and loans taken by the banks). As western banks also extended credit to household and companies, balance sheets expanded. As asset prices increased, debt levels increased (more expensive to buy new houses, so more borrowing). With interest rate low, the bank also took more risk, in an increasingly desperate hunt for higher return. Central banks, by allowing the amount of money in the economy to expand, did little to prevent this better yield seeking behavior. In addition pensions funds and insurance were trying to find ways of making their saving more attractive. Banks created new financial instruments based (derived from ) basic contracts (hence ‘derivative’) such as collateralized debt obligation (CDO), more risky but with better return assets. Because return were higher (even if sometimes the financial instruments were very risky or even fraudulent) there was no shortage of buyers. Financial assets increased rapidly: from ¼ of GDP in the US, it was 100% by 2007. It was 500% of GDp in the UK, even higher in Ireland. Bank leverage rose to 50 to 1 (for 1 dollar provided by shareholder, the bank borrowed more than 50). Substantial profits were made so regulators took an unduly benign view of these developments. The interaction between the macroeconomic imbalances (extra saving) and the developing banking system that generated the crises. Most policy maker believed that unsustainable pattern of spending and saving, would end with the collapse of the US dollar. The dollar was the currency in which emerging economies were happy to invest (the renminbi was not convertible – China in 2014 owned US$4tn). So the dollar remained strong and it was the fragility of the banks that first revealed the fault lines. First law of financial crises: an unsustainable position can continue for far longer than you would believe possible. The second law of financial crises: when an unsustainable position ends it happens faster than you could imagine. In august 2007, BN Paribas announced it stopped paying investors on three funds invested in the sub-prime market. End of 2007 market liquidity in a wide range of financial instrument dried up: the banks were vulnerable to the US sub-prime mortgage – loans to households on low incomes who were highly likely to default. In September, central banks did not believe the problem could bring down large bank: the stock of mortgage was only US$ 1tn, so losses could not be large enough for the system as a whole. This time however banks had made large bets on sub-prime markets (derivative contracts). Although those bets cancelled out as whole, some banks were in the money, other were under water. Because it was impossible to tell those apart in the short term, all banks came under suspicion. They stooped lending to each other. Banks needed injection of shareholder’s capital (not new loans as central banks were offering). Two options: either to recapitalize or to drastically reduce lending – for the economy, the former was preferable. The system staggered for a year. In Sept 2015 Lehman Brothers failed, generating a run on the US banking system by financial institutions (such as money market funds). The run spread to other advanced economies: banks around the world found it impossible to finance themselves (because no one new which bank were safe. It was the biggest global financial crisis in history. With Bank unable to refinance themselves, the Central Bank had to intervene (with recapitalization of banks starting less than a month later). The problem was that government ended up guaranteeing all private creditors of the banks, imposing on future taxpayers a burden of unknown attitude. Between autumn of 2008 and summer 2009, 10 millions jobs in US and Europe were lost, world trade fell more rapidly than during the Great Depression. In May 2009, the US treasury and Fed announced that banks could withstand the losses under different adverse scenarios. The banking crises endedbut the economic crises remained. By 2015 there had still been no return to the growth and confidence experience earlier.

The strange thing is that after the biggest financial crisis in history, nothing much has changed in terms either of the fundamental structure of banking or the reliance on central banks to restore macroeconomic prosperity.

In practice buyers and sellers simply cannot write contracts to cover every eventuality, and money and banks evolved as a way of trying to cope with radical uncertainty.

In the middle of 2015, we were still searching for a sustainable recovery despite cuts in interest rates and the printing of electronic money on an unprecedented rate. Central banks have thrown everything at their economy and the results have been disappointing.

The sharper the downturn, the more rapid the recovery. Not this time.

From an imbalance between high and low-saving countries, the disequilibrium has morphed into an internal imbalance of even greater significance between saving and spendingwithin economies.

Central bank had to create more money by purchasing large quantities of assets from private sector – the practice known as Quantitative Easing. QE was long regarded as a standard tool of monetary policy – but the scale on which it has been implemented is unprecedented.

Pounds, shilling and pence where already used in 1066 (Domesday book was the first inventory of wealth done at the time). The decimalization of anglo-saxon monetary unit happened on 1971.

The amount of money in the US economy remains stable at around 2/3 of GDP. The share of bank deposit in total has also been roughly constant at 90% (no less than 97% in the UK) (the rest is in coins and banknotes). The amount of money in the economy is determined less by the need to buy ‘stuff’ and more by the supply of credit created by private sector banks responding to borrowers.

The ability to expand the supply of money in times of crisis is essential to avoid a depression. The experience of emergency money reveals that the private sector will not always be able to meet the demand for acceptable money. [in short : Acceptable money is money accepted by all banks, based of confidence in these banks to meet their obligation if needed – what was missing in the early days of the crisis. In those days, only government was able to issue assets that were acceptable by all banks]

The creation of independent central banks with clear mandate to maintain the value of a currency in terms of a representative basket of goods and services, proved successful in stabilizing inflation in 1990s and 2000s. The conquering of inflation over the past twenty-five years was a major achievement in the management of money, and one, despite the financial crisis, not to be underrated.

5,500 tons of gold are in the vault of the Bank of England (worth US$235bn). 6,700 tons are in the Federal Reserve Bank of New York. The US hold 8,000 tons in reserve, 10,784 tons are in reserve in the Euro area, 1,000 tons in China, Uk only has 310 tons as reserve.(Wikipedia: est. 170,000 tons of gold mined on earth as at 2011).

Most money are created is private sector institutions – banks. This is the most serious fault line in the management of money in our societies today.

If before the crisis banks had exited the riskiertypes of lending, stopped buying complex derivative instruments they would, in the short term, have earned lower profit. Even understanding the risks, it was safer to follow the crowd.

It is remarkable how equal global banks are in terms of size. Among the twenty biggest banks, the ratio of assets of the largest to the smallest is little more than two to one. These 20 banks accounted for assets of US$42tn in 2014, compared with the world GDP ofUS$80tn, and for almost 40% of total world-wide bank assets.

Investment banks have been described as inventing new financial instrument that are “socially useless”. With their global reach, their receipt of bailouts from taxpayers, and involvement in seemingly never ending scandals, it is hardly surprising that the banks are unpopular.

Bank grew fast: JP Morgan today accounts for almost the same proportion of US banking as all of the top ten banks put together in 1960. Most of this has taken place in the last 30 years and has been accompanied by increasing concentration. The top ten banks in the US account for 60% of GDP (was 10% in 1960). In the UK, the assets of the top ten banks amount to over 450% of UK GDP, with Barclays and HSBC both having assets in excess of UK GDP.

In less than 50 years, the share of highly liquid assets held by UK banks declined from 33% of their assets to less than 2% today. The turning point came when the balance sheet of the financial sector became divorced from the activities of households and companies. Deregulation and derivatives in 1980 contributed to this divorce. Lending to companies is limited by the amount they wish to borrow. But there is no corresponding limit to the size of transaction in derivatives. The market for derivative in 2014 is just over US$20tn, about ½ of the assets of the largest 20 banks.

Since 1999 in the US, stand-alone investment bank that were previously organized as partnership (ie risk shared between partners – so more controlled) turned themselves into limited liability companies (where only assets are at stake, not borrowings to invest in shady business).

With a growing proportion of bank activity deriving from trading of complex instruments, it was difficult to work outhow big the risks actually were. The banks themselves seemed not to understand the risks they were taking. And, if that was the case, there was not much hope for regulators could get to grips with the potential scale of the risk.

Whether selling oversized mortgage to poor people in the US, selling inappropriate pension and other financial product to millions of people in the UK, rigging foreign exchange and other markets, failing to stop subsidiaries from engaging in money laundering and tax evasion, there seem no ends to the revelations about what bank had been doing. The total fines imposed on banks world wide since the banking crisis ended in 2009 amounted to around $300 billion.

Perhaps the enormous losses banks incurred in the crisis, and the fines levied by regulators around the world, will bring a change of heart in the banking sector.

Many of the substantial bonuses that were paid as a result of trading in derivatives reflected not profit earned in the past year but the capitalized value of a stream of profits projected years into the future. Such accounting proved more destructive than creative.

Someone who invested $1000 in Berkshire Hathaway in 1985 would by the middle of 2015 have an investment worth $161,000. A compound annual rate of return of 17%.

Limited liability in a bank with only small margin of equity capital means that the owner have incentives to take risks – to gamble for resurrection- because they receive all the profits when gamble pays off, whereas their downside exposure is limited. Those who manage other people’s money are more careless than when managing their own.

Money market funds were created in the US as way to get around the regulation that limited the interest rates banks could offer on their accounts. They were attractive alternative to bank accounts. Such funds were exposed to risk because the value of the securities in which they invested was liable to fluctuate. But the investors were led to believe that thevalue of their funds was safe. Total liability at the time of the crisis repayable on demand was over $7tn.

All non-bank financial institutions have been describe has shadow banking. Special purpose vehicle issue commercial papers – not dissimilar to bank deposit – and purchase long term securities (such as bundles of mortgages. Edge funds are also part of this shadow banking, although because they do not demand deposit, the comparison with banks is less convincing. Financial engineering allows banks and shadow banks to manufacture additional assets almost without limits, with 2 consequences: first, the new instruments are traded between big financial institutions, more interconnection results and the failure of one firm causes troubles for the others. Second, many of the banks position even out when seen as a whole, balance sheets are not restricted by the scale of the economy. When the crisis started in 2007, no one knew which banks were most exposed to risk.

And in some country the size of the banking sector had increased to a point where it was beyond the ability of the state to provide bailouts without damaging its own financial reputation – Iceland, Ireland – and it proved a near thing inSwitzerland and the UK.

Equity, debt and insurance are the basic financial contract underpinning our economy. The total global financial stock of marketable instruments (stocks, bonds) plus loans must be well over $200tn. Over the last 20 years, a wide range of new and complex instruments has emerged (known as derivatives as elaborate combination of debt, equity and insurance contracts). Derivatives typically involve little up-front payment and are a contract between two parties to exchange a flow of returns or commodities in the future.(Wikipedia : total derivatives market value as at 2014: $1,500tn, 20% more than in 2007) .

Credit Default Swap (CDS): the seller agrees to compensate the buyer in the event of default; Mortgage Backed Securities (MBS): a claim on a payments made on a bundle of hundreds of mortgages; Collateral Debt Obligation (CDO) a claim on cash flows from a set of bonds or other assets that is divided into tranches so that the lower tranches absorb the losses first –with investor able to choose which tranche to invest in. A set of five pairs of socks – like a CDO – is a legitimate tactics by a sharp salesman to sell contracts of different value (there is always a pair of socks you would never wear….).

It was rather like watching two old men playing chess in the sun for a bet of $10, and then realizing that they are watched by a crowd of bankers who are taking bets on the result to the tune of millions of dollars.

Derivative also allowed a stream of expected future profits, which might or might not be realizes, to be capitalized into current values and show up in trading profits, so permitting large bonuses to be paid today out of uncertain future prospect. These trading, with the benefit of hindsight, were little more than zero sum activity generating little or no output.

By adopting accounting convention of valuing the new instrument at the latest observed price (marking to market) and including all changes in asset values as profits, optimism in the future, whether justified or not, created large recorded profits from the trading of these new securities. In effect, anticipated future profits were capitalized and turned into current profits.

Once markets realized that different banks had different risks of failure then the whole concept of single interbank borrowing rate (LIBOR) became meaningless. With few or no transactions taking place, it was difficult and at times impossible for banks to know what rate to quote. It matters because LIBOR is used as a reference rate in drawing up derivative contracts worth trillion dollars. The benchmark interest rate used in those contract had shallow foundations and in a storm it just blew away.

High frequency trading: trader have faster access to the exchange, the computer of such firm can watch the order flow and then send in their own orders microseconds ahead of other traders, so jumping the queue and getting to the market before the price turns against them.

The switch from a fixed rule, such as gold standard, to the use of unfettered discretion led to the failure to control inflation, culminating in the great inflation of the 1970’s. Attention turned to the idea of delegating monetary policy to independent central banks with a clear mandate to achieve price stability.

Monetary policy affects output and employment in the short-run and prices in the long run. There are lags in the adjustment of prices and wages to change in demand.

The method used to create money was to buy government bonds from the private sector in return for money. Those bond purchases were described as unconventional and known as quantitative easing (QE). But open market operations to exchange money for government securities have long been a traditional tool of central banks, and were used regularly in the UK during the 1980s.

The outbreak of the First World War saw the biggest financial crisis in Europe, at least until the events of 2008. Yet even after the assassination of Archduke Franz Ferdinand in Sarajevo on 28 June 1914, there was barely a ripple in the London markets.

Countries like Germany have become large creditors, with a trade surplus in 2015 approaching 8% of GDP, and countries in the southern periphery are substantial debtors. Although much of Germany’s trade surplus is with non-euro area countries, its exchange rate is held down by membership of the euro area, resulting in an unsustainable trade position.

The ECB would, Draghi said, ‘do whatever it takes to preserve the euro. And believe me, it will be enough’. It was clear that ECB would buy Spanish and Italian sovereign debt. 10 year bond yields started to fell. By end of 2014, ten-year yield in Greece had fallen from 25% to 8%. Spain from 6% to below 2%. By end of 2014, Spain was able to borrow more cheaply than the US. Draghi’s commitment had obviously done the trick.

The euro area must pursue one, or some combination of the following four ways forward:

Continue with unemployment in the south until prices and wages have fallen enough to restore the loss of competitiveness.

Create a period of high inflation in Germany, while restraining prices and wages in the south, to eliminate differences in competitiveness.

Abandon the need to restore competitiveness within the euro area and accept the need for transfers from north to south to finance full employment in the periphery. Such tranfers can well exceed 5% of GDP.

Accept a partial or total break up of the euro are

Some economist would like to return to the original idea of the monetary union – with a strict implementation of the no bail-out clause (which makes it illegal for one member to assume the debts of another) in the European Treaty. “Economically and politically, relaxing the no bail-out clause would open the door for a massive violation of the principle of no taxation without representation, creating a strong movement toward a transfer union without democratic legitimacy”.

Although the provisions of the European Treaty had the appearance of binding treaty commitments, in times of crisis the treaty was simply ignored or reinterpreted according to political needs of the moment.

Art 125: the no bail out clause which makes it illegal for one member to assume the debt of others.

Swiss dinars in Iraq: the value of the Swiss dinar had everything to do with politics and nothing to do with the economic policies of the government issuing the Swiss dinar, because no such government existed.

The tragedy of the monetary union in Europe is not that it might collapse but that, given the degree of political commitment among the leaders of Europe, it might continue, bringing economic stagnation to the largest currency bloc in the world and holding back recovery of the wider world economy.

The key to ending the alchemy is to ensure that the risks involved in money and banking are correctly identified and borne by those who enjoy the benefits from our financial system.

The toxic nexus between limited liability, deposit insurance and lender of last resort means that there is a massive implicit subsidy to risk-taking by banks.

Since the crisis, the minimum amount of equity a bank must use to finance itself – capital requirement – has been raised and banks must also hold a minimum level of liquid assets related to deposits (and other financing that could run from the bank within 30 days). Regulators also look at the shadow banking sector and conduct stress test. Countries such as UK and US have introduced legislation to separate, or ring-fence, basic banking operations from the more complex trading activities of investment banking. And most countries have introduced special bankruptcy arrangements (to protect depositors). Regulators have pursued cases of misconduct by bank employees and the banking system has changed a great deal: Goldman Sachs balance sheet is 25% smaller in 2015 than in 2007. Many banks have turn to more traditional banking. Is all this enough? I fear not. More radical reforms are needed.

Since the bank bail outs in most advanced economies were huge, it is surprising that more has not been done since the crisis to address fundamental problem.

Irving Fisher : We could leave the banks free… to lend money as they please, provided we no longer allowed them to manufacture the money which they lend. In short nationalize money but do not nationalize the banks.

The prohibition on the creation of money by private banks is not likely to be sufficient to eliminate alchemy in our financial system.

It is time to replace the lender of last resort by the pawn broker for all seasons. First ensure that all deposits are backed by either actual cash or a guaranteed contingent claim on reserves at the central banks. Second ensure the provision of liquidity insurance is mandatory and paid upfront. Third, design a system which imposes a tax on the degree of alchemy in our financial system – private financial intermediaries should bear the social cost of alchemy.

Keynes argued that when short term and long term interest rates had reached their respective lower bounds, further increases in the money supply would not lead to lower interest rates and higher spending. Once caught in this liquidity trap, the economy could persist in a depressed state indefinitely.

But the flaw with the great stability was that many peopleconfused stability with sustainability. From the perspective of conventional macroeconomics, the situation looked sustainable. But the composition of demand was not, with disequilibrium resulting from China and Germany encouraging exports and trade surpluses. The consequence of those surpluses was significant lending to the rest of the world, with more savings invested in the world capital market. Long term interest rates started to fall (from 4% to 2% a year in 2008) and as a result asset prices (stocks, bonds, houses) rose (as future spending are discounted at a low long term rate). Household brought forward consumption and investment spending from the future to the present. GDP was evolving on a right path but the stability brought about was not sustainable: the demand was just unsustainably too high.

In 2014, Jaime Caruana, the General Manager of the Bank for International Settlements said ‘there is simply too much debt in the world today’. And Adair Turner, former chairman of Financial Service Authority, asserted that ‘ the most fundamental reason why the 2008 financial crisis has been followed by such a deep and long lasting recession is the growth of real economy leverage across advanced economies over the previous half-century’. Although such statements point to the great fragility resulting from high debt levels, debt was a consequence, not a cause of the problems that led to the crisis. Debt resulted from the need to finance higher value of stock of property. In turn, those higher values were a reflection of the lower level of long term real interest rates. The real causes of the rise of debt were the ‘saving glut’ and the response to it by western central banks that led to the fall of real interest rates.

Short term Keynesian stimulus boosts consumption, reduces saving, and encourages households to borrow more. But in the long term, US and UK need to shift away from domestic spending toward exports, to reduce trade deficit, to raise the rate of national saving and investment. The irony is that those countries most in need of the long term adjustment, the US and UK, have been most active in pursuing the short term stimulus.

By 2015, corporate debt defaults in the industrial and emerging markets economies were rising. Disruptive though a wave of defaults would be in the short run, it might enable a reboot of the economy so that it could grow in a more sustainable and balanced way. More difficult is external debt…Sovereign debts are likely to be a major headache for the world in years to come. Should these debt be forgiven? Greece encapsulates the problems. When debt was restructured in 2012, private sector creditors were bailed out. Most Greek debt is now owed to public sector institutions (ECB, IMF). There is little chance that Greece will be able to repay its debt (austerity in Greece cannot work because exchange rate cannot fall to stimulate trade).

In 1931, a crisis of the Austrian and German banking system led to the suspension of reparations. They were largely cancelled altogether at the Lausanne conference in 1932. In all Germany paid less than 21 billion marks (out of 132 billion original figure of the Reparations Commission), much of which was financed by overseas borrowing on which Germany subsequently defaulted. ‘ A debtor country can pay only when it has earned a surplus on its balance of trade, and …the attack on German exports by means of tariffs, quotas, boycotts etc. achieves the opposite result’ (Schaft, 1934)

One way of easy the financing problems of the periphery countries would be to postpone repayment of external debt to other member of the Euro area until the debtor country had achieved export surplus.

Debt forgiveness, inevitable though it may be, is not a sufficient answer to all our problems. In the short run, it could even have the perverse effect of slowing growth.

Resentment towards the conditions imposed by the IMF (or the US) in return for financial support has also led to the creation of new institutions in Asia, ranging from Chiang Mai Initiative, a network of bilateral swap arrangments between China, Japan, Korea and ASEAN, to the Chinese led Asian Infrastructure Investment Bank created in 2015.

Because the underlying disequilibrium has not been corrected, it is rational to be pessimistic about future demand. That is a significant deterrent to investment today. To solve this our approach must be twofold: to boost expected income through raising productivity and encourage relative prices, especially exchange rate, to move in a direction that support a more sustainable pattern of demand and production. The second element can be achieved through promotion of trade and restoration of floating exchange rates.

After the crisis, demand for Chinese exports fell away, and chines authority allowed credit to expand in order to boost construction spending. But before the crisis there was already excessive investment in commercial property. As a result, empty blocks of apartment and offices are a commonplace sight in new Chinese cities.

Chine now faces serious risks from its financial sector. A policy of investing one half of its national income at low rates of return financed by debt is leading to an upward spiral of debt in relation to national income.

Germany will find that it is accumulating more and more claims on other countries, with the risk that those claims turn out to be little more than worthless paper. That is already true of some of the claims of the euro area as a whole on Greece.

More than half of the world trade passes, at least on paper, through tax havens. Over half of all banking assets and a third of FDI by multinational corporations are routed offshore. Some 85% of international banking and bond issuances takes place in the so-called Euromarket, a stateless offshore zone. IMF estimated that in 2010 the balance sheet of small island financial centers added up to US$ 18 trillion, a third of world’s GDP.

A tax haven might offer a zero tax rate to non-residents but tax it own residents fully. This ring fencing between residents and non-residents is a tacit admission that what they do can be harmful.

Another way to spot a secrecy jurisdiction is to look for whether its financial services industry is very large compared to the local economy. The IMF uses this tool in 2007 to finger Britain as an offshore jurisdiction.

Transfer pricing : by artificially adjusting the price for internal transfer, multinationals can shift profits into a low-tax haven and costs into high-tax countries where they can be deducted against tax….Sometimes the prices of these transfers are adjusted so aggressively that they lose all sense of reality: a kilogram of toilet paper from China has been sold for US$4,121, a liter of apple juice has been sold out to Israel at US$2,052; ballpoint pens have left Trinidad values at US$8,500 each. Most example are far less blatant (unclear why unit price is high – transfer pricing works with product sold to offshore company at production price (to avoid taxes) and those product are resold to buying country at a price just lower the market price, so that profit in the selling country are small (and therefore not taxed much). The large difference between purchase and selling price is in the offshore country – not taxed).

Developing countries lose an estimated US$160 billion each year just to corporate trade mispricing of this kind.

The world contains about 60 secrecy jurisdictions, divide into 4 groups: Europeans, the British zone centered on the City of London, US influence zone and the fourth include some oddities (Somalia, Uruguay….)

In Europe, Switzerland, since at least the 18th century, sheltered the money of European elites. Netherland is a major tax haven. 20 times Dutch GDP ($18 trillion) flowed through Dutch offshore entities in 2008. Bono shifted his band’s financial empire to Netherland in 2006, to cut its tax bill.

Luxembourg is among the world biggest tax haven: North Korea Kim Jong Il has stashed some 4 billion dollars in Europe. Luxembourg, South Korea Intelligence said in 2010, is a favoured destination for this money.

The second group, accounting for half of the world secrecy jurisdiction, is the most important and centred on the City of London. Jersey, Guernsey, Isle of Man, Cayman island, all substantially controlled by Britain, but also Hong Kong, Singapore; Dubai, Ireland, Vanuatu which are deeply connected to the City of London. This network account for almost half of the international bank assets.

The third group: US is now, by some measures, the world’s single most important tax haven in its own rights, with a three tier system. At federal level: Tax exemptions, secrecy provisions, US banks may accepts proceeds from a range of crimes as long as the crimes are committed overseas. Individual US states offer a range of offshore lures: Florida, Wyoming, and Delaware with strong and unregulated corporate secrecy. And a network of islands such as Virgin Islands, Liberia, Marshall Islands (flag of convenience, managed by a private firm in Virginia, after a shipping registry was developed in 1986 with USAID support. Deep Water Horizon was registered in Marshall Islands. A small opaque tax haven grew alongside the shipping registry. Forming a Marshall Islands company can be done in a day for $650 and names of directors and shareholders are not mandatory in the registration process…),Panama, the biggest US influenced haven, a black hole that has become one of the filthiest money laundering sinks in the world.

Offshore finance has quietly been at the heart of the Neoconservative schemes to project US power around the globe.

The most important tax haven in the world in an island: the island of Manhattan. The second biggest is located on an island: London.

The difference between tax avoidance (legal but getting around the intent of elected legislature) and tax evasion (illegal) is the thickness of a prison wall.

US corporations paid about 2/5 of all US income taxes in the 1950’s; that share has fallen to 1/5. The top 0.1% of US taxpayers saw their effective tax rate fall from 60% in the 1960 to 33% in 2007. Billionaire Warren Buffet found that he was paying the lowest tax rate among his office staff, including the receptionist. Overall taxes have not declined,the rich have been paying less and everybody else has had to take up the slack.

Russian dirtymoney favors Cyprus, Gibraltar, Nauru, all with strong British links. Much foreign investment in China goes via the British Virgin Islands.

A drug dealer may have money in a bank account in Panama. The account is under a trust set up in Bahamas. The trustees may live in Guernsey and the trust beneficiaries could be a Wyonming corporation with directors that are professional nominees who direct hundreds of similar companies. They have company lawyers, or trustees can be lawyers themselves, who are prevented by attorney-client privilege from giving out any details. Some trust may even have a flee clause: the moment an enquiry is detected, the structure flits to another secrecy jurisdiction and assets will automatically hop elsewhere. Hong Kong is preparing legislation to allow incorporation and registration of new companies within minutes….

In 2005 Tax Justice Network estimated that wealthy individuals hold perhaps $11.5 trillion worth of wealth abroad. It is about ¼ of global wealth and equivalent to GNP of the US. This is $250 billion of taxes lost (2 or 3 times the size of the aid budget). And this is just individuals, not corporations…

Global Financial Integrity programme (Center for International Policy in Washington) calculated that $1.2 trillion in illicit financial flows in 2008from developing countries. For every dollar of aid money, the west has taken back $10 of illicit money under the table.

Eurodad has a book called Global Development Finance: illicit flow report 2009 which seeks to lay out every comprehensive official estimate of global illicit international financial flows: every page is blank.

The global offshore system helped generate the latest financial and economic crisis since 2007. 1 -By helping financial corporations to avoid regulation, offshore system helped them grow explosively, achieving “too big to fail” status and gaining the power to capture the political establishment in Washington and London. 2-As secrecy jurisdiction degraded their own financial regulations, they forced onshore jurisdiction to compete in a race towards ever laxer regulations. 3- huge illicit cross border flows (much of it unmeasured) have created massive net flows into deficit countries (US, UK) adding to the more visible macroeconomic imbalances that underpinned the crisis. 4- offshore incentives encouraged companies to borrow far too much. 5- As companies fragmented their financial affairs around the world’s tax haven, this created complexity which fed the mutual mistrust between market players that worsened the financial crisis.

Before WWI Britain did not tax profits made overseas. When war broke out, income taxes rose from 6% in 1914 to 30% in 1919 and Britain started to tax companies on their income worldwide.

The UN produced a draft model tax treaty in 1980 that was supposed to shift the balance back in favour of source countries and developing countries. The OECD intervened aggressively to stop this to ensure its own model treaty favoring rich country remained the preferred standard. The rich country model has achieved a position of near-total dominance today. Not only is there double non-taxation, but plenty of tax that would in a fairer world be paid in poor countries is paid in rich country instead.

Trusts emerged in the middle ages when knights leaving for the crusades would leave their possessions in the hands of trusted stewards, who would look after them while they were away on the behalf of the knights’ wives and children. Trusts are secrets between lawyers and their clients. When a trust is set up the original owner of an asset in theory gives it away to a trust: the trustee becomes the legal owner of the asset and must obey the terms of the trust deed. Even if the original owner dies, the trust remains and trustee is bound by law to follow its instructions. British upper classes feel comfortable separating themselves from their money and leaving it to be managed by trusted strangers (a cultural issue). Their education prepares them to recognize those would will respect their claims and whom they can trust.

Many of the structured investment vehicles that helped trigger the latest economic crisis were set up as offshore trusts, with several trillion dollars’ worth worldwide shrouded in deep secrecy.

A pervasive story exists that Switzerland put bank secrecy into place to protect German Jewish money from the Nazis. It is a myth. Amid the great depression (early 30s) workers called for more control over the banks. Bankers pressed fiercely for a new law to make it a crime to violate Swiss bank secrecy. The law was passed in 1934 making violation of bank secrecy a criminal offence. Swiss financial secrecy has existed for centuries. Catholic French kings valued Geneva’s bankers’ discretion highly – it would have been disastrous for it to be known they were borrowing from heretical Protestants.

‘It’s no use to pressuring the Swiss government, to get change, you must pressure the bank’, as demonstrated by the agreement between the US and UBS to share information on 4000 American account holders in 2010.

In 1929, culmination of a long period of deregulation and economic freedom, the richest 24,000 Americans received 630 times as much income on average as the poorest 6 million families, and the top 1% received nearly a quarter of all the income – a proportion slightly greater than the inequalities at the onset of the global crisis in 2007.

When bonds and shares are first issued, they flow into productive investment. This is generally healthy. Next a secondary market appears, where these shares and bonds are traded. These trades do not directly contribute to productive investment: they merely shuffle ownership. Well over 95% of purchases in global market today consist of this kind of secondary activity, rather than real investment. Shuffling ownership of bits of paper ought to help capital flow to those projects that offer the highest returns. A little speculative trading in these markets improve information and smooth prices. But when the volume of this dealing is a hundred times bigger than the underlying volume of trade, the result had proved to be a catastrophe.

From 1950 to 1973 annual growth rate amid widespread capital controls (and extremely high tax rates) average 4% in America and 4.6% in Europe. Per capita income in developing countries grew by a full 3% in the 60s and 70s, far faster than the rate since then. In the 80s, as capital controls were progressively relaxed around the world and tax rates fell and offshore system really began to flower, growth rates fell sharply. Countries that have grown most rapidly have been those that rely least on capital flow. Financial globalization has not generated increased investment or higher growth in emerging countries.

We msut be cautious about inferring too much from these facts, other reasons exists for high growth rates…but it shows that it is possible for countries to grow quickly while under capital control.

What has happening since the 1970s is financial liberalization on steroids: the offshore system has served as accelerator for flighty financial capital, bending capital flows so that they end up not where they find the most productive investment, but where they can find the greatest secrecy.

The Mont Pelerin society (1947, challenge to Keyne incubated in Switzerland –the world premier tax haven at the time): foundation of the global fightback against Keynes. “We must raise and train an army of fighters for freedom” Hayek. One attendee was Friedman, whose subsequent work inspired Thatcher and Reagan.

In 1957, the Pound Sterling still financed about 40% of world trade. With the empire crumbling and the pound sterling started to totter, this role was in great peril. Britain wanted to stop capital draining away by curbing bank’s overseas lending. The City objected and threatened to bankrupt the government. Curbing on lending would eventually apply to pound sterling loans by London merchant banks only. These bank – for which the international lending business was vital – simply shifted the international lending from pound to dollars. The Bank of England deemed that those transactions not to take place in the UK (as in foreign currency) and did not regulate those (as regulations would mean admission of responsibility, it was better not to regulate those markets!). While the Euromarket was undermining US control over the dollars, the US did nothing to stop its banks to work on the Euromarket. In the 1960, experts thought that the market would gradually disappear as soon as interest rates in the US would rise to European levels. In addition, the US banks wanted to keep this offshore system as quiet as possible – it was not a political issue before 1975…Eurodollars helped the US finance its deficits, fight foreign wars and throw its weight around. This was the birth of the Eurodollars and Euromarkets (which actually are not link to the Euro and exist in all main world currencies – not only dollars). Euromarkets are a booking exercise: banks would record onshore any transaction involving at least one British party, and would record of offshore operations where neither parties was British. Moscow Narodny Bank was the first on that market: Moscow was not comfortable keeping its dollars in New York in the middle of the Cold War and preferred to keep those dollars in London instead: a Marxist nation was nurturing the most unfettered capitalist system in history! And as the sterling ship sank, the city was able to scramble aboard a much more seaworthy young vessel, the Eurodollar – the City transformed itself into an offshore island. Before the 60s , countries were relatively well insulated against financial calamities that happen elsewhere, but the Euromarket connected up the world financial sectors and economies…as it grew, tides of hot money began to surge back and forth across the globe.

Starting with 200m in 1957, the euromarket kept booming. By 1970 it was measured at 46bn and by 1975 it was reckoned to have grown to exceed the size of the entire world’ foreign exchange. This market was the route through which the oil rich state surpluses (from the oil shocks) were routed to deficit plagued consumer countries. Market reached 500bn in1980, 2.6tn in 1988. By 1997, 90% of all international loans were made through this market. It is not anymore measured by the Bank of International Settlement…Every now and then government tried to tax this market – and failed. There are always technical details that allows the business to continue to flourish – it is considered a the most momentous financial innovation since the banknote, but it is very little researched.

In the Euromarket in London, the banks are not required to hold any reserve (it is unregulated, although most banks do have their own set of rules). Bank can create as much money as they want: the first $100 deposit will turn into a lending of $100, which turn into another deposit of $100 etc. etc. It never happened quite like that and there has been huge controversy about how much the Euromarket has really contributed to expanding the amount of money – since the Bank of International Settlement has stopped measuring it, we won’t know. With unlimited money creation, credit will expand into places where it was not previously able to, in more risky business. Euromarkets made it possible for credit quality to deteriorate out of sight of the regulators.

[ not a quote: In short an attempt to regulate the financial sector and control the flow of money lent to the rest of the world by London based banks led to the creation of the largest unregulated financial market (the euromarket) which contributed significantly to the financial crisis by allowing uncontrolled money creation and spread of the crisis to all financial sectors worldwide.]

The loan-back technique: mobster would move out money from the US in suitcases, put it in secret swiss account, the bank would loan back to the mobster in the US. The mobster can even deduct loan interest repayment from its taxable income…

The US Volcker commission probing the assets of dead Jews found an internal memo from a large Swiss bank that creaming off money from dead people’s account was the usual way to accumulate reserves. Not only this: in secrecy jurisdiction, depositors willingly accept below market interest rates, in exchange for secrecy. It is hardly a surprise that banks became so interested in offshore private banking.

Global Financial Integrity study (2010) between 1970 and 2008, illicit financial outflow from Africa were approximatively $854bn. Total illicit outflow may be as high as $1.8tn. Developing countries lost up to a trillion dollars in illicit outflows just in 2006 – thatis 10 dollars for every dollar of aid flowing in.

Univerist of Massachussetts in 2008: real capital flight over 35 years in 40 african countries from 1970 to 2004 is about $420bn – $607bn with interest earnings. Yet the total external debt was only 227bn. Africa is a net creditor to the rest of the world and its assets vastly exceeds its debts. But these assets belong to a narrow elite, while public debt are born by the people.

The rise of the third world lending in the 70s and 80s laid the foundations for the global tax haven network that now shelter the most venal citizens. Some suggest that at least half of the money borrowed by the largest debtor countries flowed right out again under the table. Third world debt were match almost exactly by the stock of private wealth their elite had accumulated in the US (in 1990s). Loans to Russia to deal with nuclear safety in 1990’s all disappeared…For Mexico, Argentina, Venezuela, the value of their elites offshore wealth was several times their external debt. Today the top 1% of households in developing countries own an estimated 70-90% of all private financial and real estate wealth.

Wealthy foreign investors buy up distressed sovereign debtat pennies on the dollar – typically at a 90% discount – then reap vast profits when those debts are repaid in full. One trick is to make sure that influential locals are secretly part of the investor buying the discounted rate. They help make sure the debt gets repaid. Their involvement must be hidden behind the shield of offshore secrecy.

If we consider that $18tn flowed through the netherland in 2008, just one of the many conduit havens, it is not unreasonable to estimate to tens of even hundreds of bn dollars of tax revenue are at stake for developing countries.

In 2007, the two biggest sources of foreign investment in China were not japan or the US but Hong Kong and British Virgin islands. The biggest source for investment in India is not the US or Britain or China but Mauritius, a rising star in the offshore system. A wealthy indian will send his money to Mauritius, then disguised as foreign investment, is being returned to India. The sender can avoid Indian tax on local earnings, and also use the secrecy to build monopoly by disguising the fact that a diverse array of competitors in the market is in fact controlled by the same interest.

Delaware State, in the 80’s: Chase Manhattan and JP Morgan banks hired an expert to draft the tax law and help convince the state to adopt it. The law was drafted without any analyses of a Delaware official. The law was to remove interest rate ceiling (which were in place for 200 years, law against usury) on credit cards, on personal loans, car loans and more. Banks would have powers to foreclose on people’s homes if they faulted on credit card debts, they could establish places of business overseas or offshore, and they got a regressive state tax structure to boot. And crucially, this was to be rolled out across America. The fact that Delaware law could be enacted in other states is a sign of health competition…critics says this illustrates the ability of powerful private interests to pass laws with national ramifications by singling out and exploiting the weakest and most malleable states.

Because it is small, Delaware can take advantage of opportunities, they are small, they move fast and can fill the void. They can give bankers what they need faster than anyone else. Delaware’s legislature is for hire.

Credit card debt, money market funds and numerous other instruments that fueled the borrowing binge and the crisis – the deregulation of interest rates had effect that are incalculable and is seen as one the single most important cause of the 2007 crisis.

[Not a quote: in short, the removal of interest rate cap in Delaware, led banks to do better business there and the law to be exported to other states. This led to massive credit card debt ( e.g. consumers credit card debt and loans against homes to pay credit card bills) and creation of money market funds (which supplied banks with money) were key source of the 2007 crisis. ]

Delaware became a major player in the securitization industry – the business of parceling up mortgages and other loans, and repackaging the debt and selling them on. Delaware again simply established the exact legal framework that corporation desired. The 1981 law contained a section exempting ‘affiliated finance companies’ from all state taxes. These company act like bank but are not formally banks so fall outside financial regulations. They are part of the global shadow banking system that dragged the world into economic crisis from 2007.

In 1988 the statutory trust act which provide protection of trust assets from creditors. This made Delaware the top jurisdiction for setting up so-called balance sheet CDOs (collateral debt obligations) which allowed banks tooffload their assets onto other investors, another important contributor to the crisis.

Limited liability: since the middle of 19th century: if a limited liability company goes bust, owners and shareholders may lose the money they invested, but their losses are limited to that: they are not liable for the additional debts the corporations has racked up. This was introduce to encourage people to invest. In exchange companies must have their account properly audited, and these audit published, to keep the risk manageable.

A partnership: responsibilities on losses and debt in full, lower taxes and accounts are private and undisclosed.

Jersey introduced the Limited Liability Partnership: the partnership allows less disclosure and the LL protection altogether. This is an example of having the cake and eating it. When debt are not covered, they end up being covered by the government, ultimately people’s taxes. With all audit company moving to LLP status (in UK, Aus, NZ…), it diluted auditor’s incentives to take care with their accounting. Had auditors personally faced getting into big trouble when they screwed up, they might not have been so hasty to sign off on all the off-balance sheet financing.

IMF 2010 report shows that funding flows related to Greece crisis from 15 main countries: barring France and Germany, all are major secrecy jurisdiction.

Banks achieved a staggering 16% annual return on equity between 1986 and 2006, and the banks are now big enough to hold us all to ransom. Unless taxpayers give them what they want, financial calamity ensues. This is the too big to fail problem- courtesy of offshore.

Remoteness between ownership and operation is an evil in the relations among men. (Keynes) This is the flaw in the grand bargain at the heart of the globalization project. [in relation to ownership that is transferred from owner to owner by finance institutions, with no link with the real operation in the economic world]

In 1998, the OCED new project was the first serious and sustained intellectual assault on the secrecy jurisdictions in world history. The Coalition for Tax Competition, at the Cato Institute, was set up to counter the move.

A branch of economics known as public choice theory which rejects the notion that politicians act on the behalf of people and societies and instead look at them as self-interested individuals. James Buchanan and Vernon Smith, economists, studies this.

The rich have seen their wealth and income soar. They also shifted their income out of personal income tax category into corporation tax, to be taxed at far lower corporate tax rates.The richest 400 Americans in 1992 booked 26% of their income as salaries and 36% as capital gains. By 2007, they recorded 6% as salaries and 66% as capital gains. The same happened in all high-income categories and in all OECD countries since at least the 1970s. IN contrast, working population has seen its personal income taxes and social security contributions rise over the last 30 years.

Between 1990 and 2001, corporation tax revenues in low income countries fell by 25%. This is especially troubling because developing countries find it much easier to tax a few big corporations than millions of poor people.

IMF study in 2009 concluded that tax incentives, which are supposed to attract investors, slash tax revenues but do not promote growth.

In the golden age of 1947-1973 the US economy grew at nearly 4% a year, while top marginal tax rate was between 75 and 90%. Those tax rates did not cause that growth, nut high taxes didn’t choke it either.

It is inequality, rather than absolute level of poverty and wealth, that determines how society fare on almost every single indicator of well-being.

The low income countries that have been growing the fastest, like China, tend to be those that have exported capital, not imported it.

The best way for countries to share information is through the so-called automatic exchange of information, where they tell each other about their taxpayers’ financial affairs. This happens inside Europe and in a few other countries. But there is another way of sharing information, ‘on request’: a country will agree to hand over information but only on a case by case basis, only when specifically asked and only under very narrow conditions – the requested must be able to demonstrate why they need the information. In other word, the requester must already know, more or less, what it is [they are looking for]. No fishing expeditions are allowed. You can’t prove criminality until you get the information, and you can’t get the information until you prove criminality.

The human factor of life of offshore: There is something about island life that stifles dissent and encourages the pervasive groupthink. ‘An enemy on an island is an enemy forever’ There is no blending into anonymous background, no neighboring society to shift toward. Islanders are required to watch their step, moment by moment. The ability to sustain an established consensus and suppress troublemakers makes islands especially hospitable to offshore finance. The local establishment can be trusted not to allow democratic politics to interfere in the business of making money [which in general benefit the islands but is to the detriment of the rest of the world]

In small jurisdictions – not necessarily islands- it is so easy for collective inferiority complexes to emerge, where residents come to see themselves as defenders of local interests against the predations of bigger, bullying neighbors.

In tiny states, everyone knows everyone else, and conflicts of interest and corruption are inevitable.

When Irish musician Bono, for years the world’s most prominent poverty campaigner, shift its financial affairs to Netherlands to avoid tax and is still warmly welcomed in society, the battle seems lost.

The shadow banking system: structured investment vehicles, asset-backed commercial paper conduits and other unregulated structures whose assets, by the time of the crisis in 2007, were greater than the entire $10tn US banking system, and which nearly brought the world economy to its knee.

In 1997, the Labour gave the Bank of England its operational independence, a gift of economic and political power to the City, the most radical shake up of the Bank in its 300-year history.

London has more foreign banks than any other financial center: by 2008 it accounted for half of all international trade in equities, 70% of Eurobond turnover, 35% of global currency trading and 55% of international public offerings. New York was bigger in areas like securisation, insurance, mergers and acquisitions and asset management, but much of its business is domestic, making London the world’s biggest international – and offshore – financial hub.

Richard Branson, who owns his business empire through a maze of offshore trusts and companies, said in 2002 that his company would be half its size if it had not legally avoided tax via offshore structures.

International Accounting Board Standard (IASB) sets the rules for how companies around the world publish their financial data. Over one hundred countries use these standards. Its rule let multinational corporations consolidate results in different countries into one single figure. There is no way to unpick the numbers to work out profit in each country. Given that 60% of world trade happens inside multinational corporations, this is massive opacity. The IASB is not a public rule-setting body, accountable to democratic parliaments; it is a private company registered in Delaware, financed by the big four accountancy firms and some of the world’s biggest corporations. This is an example of privatization of public policy making.

The City of London is the oldest continuous municipal democracy in the world, the Corporation boast. It dates from 1067 and is rooted in the ancient rights and privileges enjoyed by citizens before the Norman Conquest in 1066. It has remained a political fortress withstanding tides of history. Britain’s rulers have needed the City’s money and given the City what it wants in exchange.

The Bank of England, like other financial regulators, answers to Parliament, not to the Corporation, but its physical location at the centre of City reflects where its heart lies.

When the Government launched an inquiry in 2008 into the financial crisis, every single one of the team’s 21 members had background in financial services. It was hardly a surprise when the report recommended no real changes.

English libel laws are among the comforts for those with dirty money who come to London. There is no constitutional protection for free speech and the burden of proof is deposited squarely on the shoulder of the defendant, unlike nearly everywhere else. Libel litigation in England and Wales cost 140 times the European average. Many things in this book have been self-censored. Effective change in the law would significantly weaken Britain’s offshore empire.

In Britain, 0.3% of the population owns 2/3 of the land, in famously unequal Brazil, 1% of the population owns half of the land.

Until 1970’s offshore explosion, UK banks expanded their balance sheet cautiously, in line with spending in the economy, and combined they were worth half of the GDP. In the beginning of twenty-first century their balance sheets had grown to over 5 times of GDP.

Ancien regime in France fell in the 18th century because the richest country in Europe, which had exempted its nobles from taxation, could not pay its debt.

Recommendations: The veil of silence and ignorance can be lifted; blacklisting of havens; country by country accounting reporting for big corporations; automatic information sharing between countries; priorities the needs of developing countries; focus on improving tax systems in developing countries; confront the British spider web, the most aggressive single element in the global offshore system; new taxation approach based on the substance of what they do in the real world, rather than on the legal fictions its accountants have cooked up; Onshore tax reform with focus on land and land rental value which encourage the best use of land – and proof against offshore escape. Other focus should be on mineral rich countries with oil money sluicing into the offshore system, distorting the global economy; tax and regulate the financial industries according to an economy’s real needs – ignoring the threat of relocation offshore by companies; tackle the intermediaries and private users of offshore (e.g. pressure on banks, not only on governments); corporate responsibility – limited liabilities is a privilege for instance, corporations can be held to a set of obligations to the society (notably transparency). Offshore undermined this: privilege are still there but obligations have withered; Reevaluate corruption, it worsen poverty and inequalities. Parallels between bribery and the business of secrecy is no coincidence – we are talking about the same thing; change the culture: pundits, journalist, politician can not fawn over people who get rich by abusing the system. Professional associations of lawyers, accountants and bankers need to create code of conduct to prevent assisting financial crimes.